If the cost of capital is 10%, what is the MIRR of this project and should...

Question

Question

If the cost of capital is 10%, what is the MIRR of this project and should be accepted or rejected?

Year 0 1 2 3 4 5 6

Cash Flow -$1000 200 400 600 600 200 600

6.76%, reject

20.87%, accept

21.72%, accept

32.12%, accept

None of the above

Answer 1

Answer #1

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence future value of inflows=200*(1.1)^5+400*(1.1)^4+600*(1.1)^3+600*(1.1)^2+200*(1.1)^1+600

=$3252.342

MIRR=[future value of inflows/Present value of outflows]^(1/time period)-1

=[$3252.342/1000]^(1/6)-1

which is equal to

=21.72%(Approx).

Hence since MIRR is greater than cost of capital;project must be accepted.

Answer 2

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